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Missing Values Handling for Machine Learning Portfolios

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  • Andrew Y. Chen
  • Jack McCoy

Abstract

We characterize the structure and origins of missingness for 159 cross-sectional return predictors and study missing value handling for portfolios constructed using machine learning. Simply imputing with cross-sectional means performs well compared to rigorous expectation-maximization methods. This stems from three facts about predictor data: (1) missingness occurs in large blocks organized by time, (2) cross-sectional correlations are small, and (3) missingness tends to occur in blocks organized by the underlying data source. As a result, observed data provide little information about missing data. Sophisticated imputations introduce estimation noise that can lead to underperformance if machine learning is not carefully applied.

Suggested Citation

  • Andrew Y. Chen & Jack McCoy, 2022. "Missing Values Handling for Machine Learning Portfolios," Papers 2207.13071, arXiv.org, revised Jan 2024.
    • Handle: RePEc:arx:papers:2207.13071
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    References listed on IDEAS

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